China’s Sovereign Wealth Fund Tries to Bolster Stocks of Major Banks

The China Banking Regulatory Commission is putting heavy pressure on banks to raise capital. The regulators want to prepare banks to meet rising international standards for capital adequacy and to strengthen the banks’ balance sheets against possible losses on big loans issued to Chinese companies and local governments during China’s economic stimulus program in 2009 and 2010.

The Agricultural Bank of China, one of the four main banks that together control two-thirds of the Chinese banking market, has already said that it intends to raise more capital next year. And investors have been watching for moves to sell shares by the other three: the Industrial and Commercial Bank of China, China Construction Bank and the Bank of China.

“One of the things depressing the share prices is that the existing public shareholders worry that they’re going to get diluted,” said Nicholas R. Lardy, a senior fellow at the Peter G. Peterson Institute for International Economics in Washington.

“The purchase by Central Huijin may trigger a short-term market rally as it indicates that the biggest shareholder of the banks believes that current prices are low enough to buy,” said Zhang Qi, a Shanghai-based analyst at Haitong Securities.

“But it’s still too early to say that the general market has bottomed out given the weak outlook of the domestic economy and the uncertainties in the global markets.”

The benchmark Shanghai Composite Index continued to slump on Monday, closing at 2,344.79 points with merely 40 billion yuan ($6.29 billion) turnover, compared with nearly 200 billion yuan in late March. The Shanghai index has declined 18 percent this year on investor concern over the financial turmoil in Europe and the US.